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When it comes to reckless money creation, it turns out that China is the king. Over the past five years, Chinese bank assets have grown from about 9 trillion dollars to more than 24 trillion dollars. This has been fueled by the greatest private debt binge that the world has ever seen. According to a recent World Bank report, the level of private domestic debt in China has grown from about 9 trillion dollars in 2008 to more than 23 trillion dollars today. In other words, in just five years the amount of money that has been loaned out by banks in China is roughly equivalent to the amount of debt that the U.S. government has accumulated since the end of the Reagan administration. And Chinese bank assets now absolutely dwarf the assets of the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England combined. You can see an amazing chart which shows this right here. A lot of this “hot money” has been flowing out of China and into U.S. companies, U.S. stocks and U.S. real estate. Unfortunately for China (and for the rest of us), there are lots of signs that the gigantic debt bubble in China is about to burst, and when that does happen the entire world is going to feel the pain.

You read that right: in the past five years the total assets on US bank books have risen by a paltry $2.1 trillion while over the same period, Chinese bank assets have exploded by an unprecedented $15.4 trillion hitting a gargantuan CNY147 trillion or an epic $24 trillion – some two and a half times the GDP of China!

Putting the rate of change in perspective, while the Fed was actively pumping $85 billion per month into US banks for a total of $1 trillion each year, in just the trailing 12 months ended September 30, Chinese bank assets grew by a mind-blowing $3.6 trillion!

I was curious to see what all of this debt creation was doing to the money supply in China. So I looked it up, and I discovered that M2 in China has grown by about 1000% since 1999…

So what has China been doing with all of that money?

Well, they have been on a buying spree unlike anything the world has ever seen before. For example, according to Reuters China has essentially bought the entire oil industry of Ecuador…

China’s aggressive quest for foreign oil has reached a new milestone, according to records reviewed by Reuters: near monopoly control of crude exports from an OPEC nation, Ecuador.

Last November, Marco Calvopiña, the general manager of Ecuador’s state oil company PetroEcuador, was dispatched to China to help secure $2 billion in financing for his government. Negotiations, which included committing to sell millions of barrels of Ecuador’s oil to Chinese state-run firms through 2020, dragged on for days.

And the Chinese have been doing lots of shopping in the United States as well. The following is an excerpt from a recent CNBC article entitled “Chinese buying up California housing“…

At a brand new housing development in Irvine, Calif., some of America’s largest home builders are back at work after a crippling housing crash. Lennar, Pulte, K Hovnanian, Ryland to name a few. It’s a rebirth for U.S. construction, but the customers are largely Chinese.

“They see the market here still has room for appreciation,” said Irvine-area real estate agent Kinney Yong, of RE/MAX Premier Realty. “What’s driving them over here is that they have this cash, and they want to park it somewhere or invest somewhere.”

Apparently a lot of these buyers have so much cash that they are willing to outbid anyone if they like the house…

The homes range from the mid-$700,000s to well over $1 million. Cash is king, and there is a seemingly limitless amount.

“The price doesn’t matter, 800,000, 1 million, 1.5. If they like it they will purchase it,” said Helen Zhang of Tarbell Realtors.

So when you hear that housing prices are “going up”, you might want to double check the numbers. Much of this is being caused by foreign buyers that are gobbling up properties in certain “hot” markets.

Chinese conglomerate Fosun International Ltd. (0656.HK) will buy office building One Chase Manhattan Plaza for $725 million, adding to a growing list of property purchases by Chinese buyers in New York city.

The Hong Kong-listed firm said it will buy the property from JP Morgan Chase Bank, according to a release on the Hong Kong Stock Exchange website.

Chinese firms, in particular local developers, have looked overseas to diversify their property holdings as the economy at home slows. Chinese individuals also have been investing in property abroad amid tight policy measures in the mainland residential market.

Earlier this month, Chinese state-owned developer Greenland Holdings Group agreed to buy a 70% stake in an apartment project next to the Barclays Center in Brooklyn, N.Y., in what is the largest commercial-real-estate development in the U.S. to get direct backing from a Chinese firm.

And in a previous article, I discussed how the Chinese have just bought up the largest pork producer in the entire country…

Just think about what the Smithfield Foods acquisition alone will mean. Smithfield Foods is the largest pork producer and processor in the world. It has facilities in 26 U.S. states and it employs tens of thousands of Americans. It directly owns 460 farms and has contracts with approximately 2,100 others. But now a Chinese company has bought it for $4.7 billion, and that means that the Chinese will now be the most important employer in dozens of rural communities all over America.

But more than anything else, the Chinese seem particularly interested in acquiring real money.

And by that, I mean gold and silver.

In recent years, the Chinese have been buying up thousands of tons of gold at very depressed prices. Meanwhile, the western world has been unloading gold at a staggering pace. By the time this is all over, the western world is going to end up bitterly regretting this massive transfer of real wealth.

Unfortunately for the Chinese, it appears that the unsustainable credit bubble that they have created is starting to burst. According to Bloomberg, the amount of bad loans that the five largest banks in China wrote off during the first half of this year was three times larger than last year…

China’s biggest banks are already affected, tripling the amount of bad loans they wrote off in the first half of this year and cleaning up their books ahead of what may be a fresh wave of defaults. Industrial & Commercial Bank of China Ltd. and its four largest competitors expunged 22.1 billion yuan of debt that couldn’t be collected through June, up from 7.65 billion yuan a year earlier, regulatory filings show.

And Goldman Sachs is projecting that China may be facing 3 trillion dollars in credit losses as this bubble implodes…

Interest owed by borrowers rose to an estimated 12.5 percent of China’s economy from 7 percent in 2008, Fitch Ratings estimated in September. By the end of 2017, it may climb to as much as 22 percent and “ultimately overwhelm borrowers.”

Meanwhile, China’s total credit will be pushed to almost 250 percent of gross domestic product by then, almost double the 130 percent of 2008, according to Fitch.

The nation might face credit losses of as much as $3 trillion as defaults ensue from the expansion of the past four years, particularly by non-bank lenders such as trusts, exceeding that seen prior to other credit crises, Goldman Sachs Group Inc. estimated in August.

The Chinese are trying to get this debt spiral under control by tightening the money supply. That may sound wise, but the truth is that it is going to create a substantial credit crunch and the entire globe will end up sharing in the pain…

Yields on Chinese government debt have soared to their highest levels in nearly nine years amid Beijing’s relentless drive to tighten the monetary spigots in the world’s second-largest economy.

The higher yields on government debt have pushed up borrowing costs broadly, creating obstacles for companies and government agencies looking to tap bond markets. Several Chinese development banks, which have mandates to encourage growth through targeted investments, have had to either scale back borrowing plans or postpone bond sales.

This could ultimately be a much bigger story than whether or not the Fed decides to “taper” or not.

It has been the Chinese that have been the greatest source of fresh liquidity since the last financial crisis, and now it appears that source of liquidity is tightening up.

So as the flow of “hot money” out of China starts to slow down, what is that going to mean for the rest of the planet?

Are the central banks of the world starting to lose control of the financial markets? Could we be facing a situation where the bond bubble is going to inevitably implode no matter what the central bankers do? For the past several years, the central bankers of the planet have been able to get markets to do exactly what they want them to do. Stock markets have soared to record highs, bond yields have plunged to record lows and investors have literally hung on every word uttered by Federal Reserve Chairman Ben Bernanke and other prominent central bankers. In the United States, it has been remarkable what Bernanke has been able to accomplish. The U.S. government has been indulging in an unprecedented debt binge, the Fed has been wildly printing money, and the real rate of inflation has been hovering around 8 to 10 percent, and yet Bernanke has somehow convinced investors to lend gigantic piles of money to the U.S. government for next to nothing. But this irrational state of affairs is not going to last indefinitely. At some point, investors are going to wake up and start demanding higher returns. And we are already starting to see this happen in Japan. Wild money printing has actually caused bond yields to go up. What a concept! And that is what should happen – when central banks recklessly print money it should cause investors to demand a higher return. But if bond investors all over the globe start acting rationally, that is going to cause the largest bond bubble in the history of the planet to burst, and that will create utter devastation in the financial markets.

Central banks can manipulate the financial system in the short-term, but there is usually a tremendous price to pay for the distortions that are caused in the long-term.

In Bernanke’s case, all of this quantitative easing seemed to work well for a while. The first round gave the financial system a nice boost, and so the Fed decided to do another. The second round had less effect, but it still boosted stocks and caused bond yields to go down. The third round was supposed to be the biggest of all, but it had even less of an effect than the second round. If you doubt this, just check out the charts in this article.

Our financial system has become addicted to this financial “smack”. But like any addict, the amount needed to get the same “buzz” just keeps increasing. Unfortunately, the more money that the Fed prints, the more distorted our financial system becomes.

The only way that this is going to end is with a tremendous amount of pain. There is no free lunch, and there are already signs that investors are starting to wake up to this fact.

As investors wake up, they are going to realize that this bond bubble is irrational and entirely unsustainable. Once the race to the exits begins, it is not going to be pretty. In fact, the are indications that the race to the exits has already begun…

During the month of June, fixed income allocations fell to a four-year low, according to the American Association of Individual Investors, as major bond fund managers like Pimco experienced record withdrawals for the second quarter. That pullback sent places like emerging markets and high-yield bonds reeling—just as the Federal Reserve signaled plans to taper its easy-money policies within the coming years. Benchmark bond yields ticked up on that news, and in an unexpected twist, the stock market nosedived as well.

A lot of people out there have been floating the theory that the Fed will decide not to taper at all and that quantitative easing will continue at the same pace and therefore the markets will settle back down.

But what if they don’t settle back down?

Could the bond bubble implode even if there is no tapering?

That is what some are now suggesting. For example, Detlev Schlichter is pointing to what has been happening in Japan as an indication that the paradigm has changed…

My conclusion is this: if market weakness is the result of concerns over an end to policy accommodation, then I don’t think markets have that much to fear. However, the largest sell-offs occurred in Japan, and in Japan there is not only no risk of policy tightening, there policy-makers are just at the beginning of the largest, most loudly advertised money-printing operation in history. Japanese government bonds and Japanese stocks are hardly nose-diving because they fear an end to QE. Have those who deal in these assets finally realized that they are sitting on gigantic bubbles and are they trying to exit before everybody else does? Have central bankers there lost control over markets?

After all, money printing must lead to higher inflation at some point. The combination in Japan of a gigantic pile of accumulated debt, high running budget deficits, an old and aging population, near-zero interest rates and the prospect of rising inflation (indeed, that is the official goal of Abenomics!) are a toxic mix for the bond market. It is absurd to assume that you can destroy your currency and dispossess your bond investors and at the same time expect them to reward you with low market yields. Rising yields, however, will derail Abenomics and the whole economy, for that matter.

The financial situation in Japan is actually very similar to the financial situation in the United States. We both have “a gigantic pile of accumulated debt, high running budget deficits, an old and aging population, near-zero interest rates and the prospect of rising inflation”. In both cases, rational investors should demand higher returns when the central bank fires up the printing presses.

And if interest rates on U.S. Treasury bonds start to rise to rational levels, the U.S. government is going to have to pay more to borrow money, state and local governments are going to have to pay more to borrow money, junk bonds will crash, the market for home mortgages will shrivel up and economic activity in this country will slow down substantially.

Is the U.S. economy going to be okay? Well, if the only source you listened to was the mainstream media, you would be left with the distinct impression that the U.S. economy is heading toward a full recovery and that everything is going to be alright. Unfortunately, that is not the case at all. The United States is rapidly becoming poorer as a nation and less competitive in the global marketplace. At the same time, consumer debt levels are rising, corporate debt levels are rising, state and local government debt levels are rising and the U.S. government is indulging in a debt binge unlike anything the world has ever seen. Considering the insane amount of money the U.S. government has been pumping into the economy, we should have seen a much more robust recovery by now. Instead, the employment statistics have barely moved and government dependence is at an all-time high. That is really sad, because this is as good as “the recovery” is going to get. The next major economic downturn is just around the bend, and in future years millions of us will desperately yearn for the “good old days” of 2012.

Below, I have compiled a list of things that I have entitled “Everything Is Going To Be Alright?”

It is composed in the form of a song, but it really isn’t meant to be sung. It is probably actually more of an economic horror poem than it is a song. What I have tried to do is to point out the absurdity of what we are all being told by our politicians and by the media. Hopefully you will enjoy reading it as much as I enjoyed writing it….

Everywhere you turn these days, someone is proclaiming that the economy is improving. Barack Obama is endlessly touting the “improvement” in the economy, the mainstream media is constantly talking about “the economic recovery” and an increasing number of Americans seem to be buying into this line of thinking. A new NBC/Wall Street Journal poll found that 37 percent of Americans believe that the economy will improve over the next year, while only 17 percent of Americans believe that it will get worse. But is the economy actually improving? Not really. At the moment things are relatively stable. Some economic statistics are improving slightly and some continue to get even worse. However, it is very important to keep in mind that one of the biggest reasons why things have stabilized is because the federal government is pumping more than a trillion dollars a year into the economy that it does not have. The Obama administration is engaging in a debt binge unlike anything America has ever seen before, and yet many economic indicators are still in decline. So what is going to happen when the federal government stops injecting gigantic waves of borrowed money into the economy? That is a frightening thing to think about. The best efforts of our “leaders” in Washington D.C. are not accomplishing a whole lot. The Federal Reserve has pushed interest rates as low as they can go and the federal government is spending unprecedented amounts of money. But even with the federal government and the Federal Reserve pushing the accelerator all the way to the floor, the economy is still not improving much at all. Millions upon millions of Americans out there are anticipating some sort of a “great economic recovery”, and they are going to be bitterly disappointed.

But right now there are some “bright spots” in the economy, and you are bound to run into family and friends that will repeat to you the nonsense that they are hearing on the television about how the economy is recovering.

When they try to convince you that the economy is getting better, ask them these questions….

If the economy is getting better, then why did new home sales in the United States hit a brand new all-time record low during 2011?

If the economy is getting better, then why are there 6 million less jobs in America today than there were before the recession started?

If the economy is getting better, then why has the number of homeless female veterans more than doubled?

If the economy is getting better, then why has the number of Americans on food stamps increased by 3 million since this time last year and by more than 14 million since Barack Obama entered the White House?

If the economy is getting better, then why has the number of children living in poverty in America risen for four years in a row?

If the economy is getting better, then why is the percentage of Americans living in “extreme poverty” at an all-time high?

If the economy is getting better, then why is the Federal Housing Administration on the verge of a financial collapse?

If the economy is getting better, then why do only 23 percent of American companies plan to hire more employees in 2012?

If the economy is getting better, then why has the number of self-employed Americans fallen by more than 2 million since 2006?

If the economy is getting better, then why did an all-time record low percentage of U.S. teens have a job last summer?

If the economy is getting better, then why does median household income keep declining? Overall, median household income in the United States has declined by a total of 6.8% since December 2007 once you account for inflation.

If the economy is getting better, then why has the number of Americans living below the poverty line increased by 10 million since 2006?

If the economy is getting better, then why is the average age of a vehicle in America now sitting at an all-time high?

If the economy is getting better, then why are 18 percent of all homes in the state of Florida currently sitting vacant?

If the economy is getting better, then why are 19 percent of all American men between the ages of 25 and 34 living with their parents?

If the economy is getting better, then why does the number of “long-term unemployed workers” stay so high? When Barack Obama first took office, the number of “long-term unemployed workers” in the United States was approximately 2.6 million. Today, that number is sitting at 5.6 million.

But there is some good news.

When Barack Obama first took office, an ounce of gold was going for about $850. Today, the price of an ounce of gold is over $1700.

The era of great prosperity that America has enjoyed for so long is coming to an end.

In fact, our long-term economic decline is about to accelerate.

So enjoy this “bubble of hope” while you can, because it won’t last long.

As I have written about previously, many are warning that Europe is on the verge of a nightmarish financial crisis that could potentially plunge us into a global recession even worse than 2008.

Just because the economy is about to go through hard times does not mean that you have to go through hard times personally.

Right now, you can decide to make an investment or start a business that will thrive in a tough economic environment.

Victory often goes to the most prepared. So don’t just sit there while the storm clouds gather. Instead, this should be a time when you are gathering resources and developing a gameplan for the coming economic chaos.

Those that choose to have blind faith in “the system” are going to be tremendously disappointed in the years ahead. Just because you have a job right now does not mean that it is always going to be there. Just because your stock portfolio is doing well right now does not mean that will always be the case.

Hopefully we all learned some important lessons from 2008. The global financial situation can turn on a dime. When markets fall apart, they tend to do so very rapidly.

Ultimately, the debate about whether the economy is improving or not is going to be ended very emphatically. When the next wave of the financial crisis hits, there will be no doubt about what direction things are going.

It really is hard to find the words to describe the true horror of the national debt. The U.S. government has been on the greatest debt binge in all of human history, and a day of reckoning is coming that is going to be so painful that it is going to shock America to the core. We have lived so far above our means for so long that none of us really has any concept of what “normal” is like anymore. The United States has enjoyed the greatest party in the history of the world, but now this decades-old party is ending and the bills are coming due. It was Dick Cheney who famously said that “deficits don’t matter”. Well, try telling that to the nation of Greece right about now. The horror that Greece is just beginning to experience is a preview of what is going to happen to us as well. Only when it happens to us it is going to be so much worse, because when we go down we are going to bring the entire global financial system down with us.

What we have done to future generations is beyond sickening. Previous generations entrusted to us the greatest economic machine in the history of the world and we destroyed it. Now we are leaving to our children and our grandchildren an economic future that has been totally wiped out and a national debt of more than 14 trillion dollars that we expect them to repay.

In Washington D.C. these days, there is a lot of talk about the debt ceiling. But whatever the politicians do, it is not going to solve our debt problems. If the debt ceiling does not get raised, we move the financial pain into the present. World financial markets would crash and that would be followed by a devastating economic nightmare.

If we do raise the debt ceiling, that will “kick the can down the road” a little bit farther. However, world financial markets will still crash eventually and our eventual economic nightmare will be even worse.

Well, can’t we just “inflate our way” out of debt?

No, unfortunately things are just not that easy. If we try to inflate our way out of debt, interest rates will likely rise just as quickly as inflation does, and that would be absolutely catastrophic.

Before interest rates even reached 20% we would hit a point where it would take every single dollar taken in by the federal government just to pay the interest on the national debt.

Meanwhile, rapidly rising inflation would devastate the value of all of your bank accounts and every other single financial asset that you own.

So no, inflating our way out of debt is not going to work.

At the moment, the U.S. federal government is able to borrow gigantic quantities of money at super low interest rates.

When that changes, all hell is going to be unleashed.

The following are 41 statistics about the national debt that are almost too crazy to believe….

13 – The U.S. government borrows an average of about 168 million dollars every single hour.

14 – The combined debt of the major GSEs (Fannie Mae, Freddie Mac and Sallie Mae) has increased from 3.2 trillion in 2008 to 6.4 trillion in 2011. Thanks to George W. Bush, Barack Obama and the U.S. Congress, U.S. taxpayers are guaranteeing that debt. This is debt that is not even included in the $14.3 trillion national debt figure.

15 – Some experts estimate that the unfunded liabilities of the U.S. government for programs such as Social Security and Medicare are in the neighborhood of 60 trillion dollars. Other experts claim that the total for federal government unfunded liabilities could be well over $100 trillion. But what almost everyone agrees on is that it is going to be virtually impossible to even come close to meeting all of those obligations.

16 – The U.S. government currently has to borrow approximately 41 cents of every single dollar that it spends.

18 – The level of government waste in this country is absolutely mind blowing. For example, the Department of Health and Human Services has just announced a brand new $500 million program that will, among other things, seek to solve the problem of 5-year-old children that “can’t sit still” in a kindergarten classroom.

20 – The cost for the first week of airstrikes on Libya was 600 million dollars. Keep in mind that the leader of the opposition in Libya has admitted that his forces contain large numbers of the same “al-Qaeda fighters” that were shooting at American troops in Iraq. So we are going broke and we are helping al-Qaeda take power in Libya at the same time.

21 – Just one day of the war in Afghanistan costs more money than it took to build the entire Pentagon.

22 – In 1980, government transfer payments accounted for just 11.7% of all income. Today, government transfer payments account for 18.4% of all income.

23 – 59 percent of all Americans now receive money from the federal government in one form or another.

24 – Back in 1965, only one out of every 50 Americans was on Medicaid. Today, one out of every 6 Americans is on Medicaid.

25 – Back in 1950, each retiree’s Social Security benefit was paid for by approximately 16 workers. Today, each retiree’s Social Security benefit is paid for by approximately 3.3 workers. By 2025 it is projected that there will be approximately two workers for each retiree.

29 – If the U.S. government was forced to use GAAP accounting principles (like all publicly-traded corporations must), the U.S. government budget deficit would be somewhere in the neighborhood of $4 trillion to $5 trillion each and every year.

According to a recent note from the sage of Dallas based Hayman Capital, highly respected Kyle Bass, a move back to 5% (2006 levels) in short term interest rates will increase annual U.S. interest expense by almost $700 billion annually. This is against current U.S. government tax revenues of $2.228 trillion (CBO FY 2011 forecast).

37 – A trillion $10 bills, if they were taped end to end, would wrap around the globe more than 380 times. That amount of money would still not be enough to pay off the U.S. national debt.

38 – If Bill Gates gave every penny of his fortune to the U.S. government, it would only cover the U.S. budget deficit for 15 days.

39 – If you were alive when Jesus was born and you spent one million dollars every single day since that point, you still would not have spent one trillion dollars by now. But this year alone the U.S. government is going to add more than a trillion dollars to the national debt.

40 – If you went out today and started spending one dollar every single second, it would take you over 31,000 years to spend one trillion dollars.

41 – If the federal government began right at this moment to repay the U.S. national debt at a rate of one dollar per second, it would take over 440,000 years to pay off the national debt.

You might be depressed after reading all of those statistics about the national debt, but there is some good news.

The national debt is a problem that should have been handled 20 or 30 years ago.

But it wasn’t.

So now what we have to look forward to is a very bleak future. Even if we totally scrapped our current monetary system and repudiated the debt, the transition would be “rocky” at best and we would not enjoy anything close to the standard of living that we are enjoying today.

Unfortunately, the vast majority of our politicians in Washington D.C. would never even dream of abandoning the current system. Most of them still totally believe in it.

But this current system is headed for an inevitable collapse. There is no way of getting around it.

Even most of our top politicians are now admitting that our current state of affairs is “unsustainable”. They just don’t have the guts to do anything about it.